Stocks

1
Stocks

• Chapter 9

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Common Preferred StockSection 9.1

• Identify the reasons for investing in common
  stock
• Identify the reasons for investing in preferred
  stock

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Why its important

• Recognizing the reasons for investing in common
  and preferred stock will enable you to make the
  best investments for your financial situation

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Common Stock

• Stockholders owners of shares of stock in the
  company
• (earn a return or gain on investment)
• Money used to
• Make sell products
• Fund company operations
• Expand

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Types of corporations

• Private- aka, closely held corporation, is one
  whose shares are owned by a relatively small
  group of people and are not openly trades in
  stock markets.
• Public-aka, publicly held corporation, is one
  that sells its shares openly in stock markets
  where anyone can buy them.

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Reasons to sell stock to fund business activities

• A form of equity corp. do not have to repay the
  money a stockholder pays for stocks
• Dividends not Mandatory-board of directors will
  make the decisions about paying dividends
• Voting Rights and control of company-stockholders
  can vote on company business. 1 vote for 1 share
  of stock
• Proxy-transfers voting rights to someone else
• Preemptive rights-gives current stock holders the
  right to buy new stock issues before the public.

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Why investors purchase common stock

• Income from dividends
• Dollar appreciation of stock
• Possibility of increase value from stock splits

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Stock Split Example
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Preferred Stock

• Gives the owner the advantage of receiving cash
  dividends before common stock holders receive
  cash dividends
• You will know the dollar amount of the dividend
• Par value-assigned random dollar value that is
  printed on a stock certificate

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Why corp. issue preferred stock.

• Less common way to raise money
• Attracts more conservative investors
• Limited voting rights-when company is in
  financial trouble

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Why investors purchase preferred stock

• middle investment
• Cumulative preferred stock-unpaid dividends build
  up and must be paid before common stockholders
• Convertible preferred stock-may be exchanged for
  a specificed number of common shares
• Participation feature-allows preferred
  stockholders to share in the corps earnings with
  common stockholders.

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Evaluation of a stock issueSection 9.2

• How to evaluate stock investments

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Why its Important

• Understanding how to evaluate stocks and learning
  how they are bought and sold will help you invest
  in stocks wisely and increase the value of your
  investments.

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Categories of stocks

• Blue chip stocks-Safe investment that attracts
  consevattive investors.
• Strongest and most respected companies
• Look for leadership in industry, history of
  stable earning, consistency in dividend payemnts
• Ex. ATT, GE, Kellogg

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Income Stock

• Pays higher than average dividends compared to
  other stock issues
• Dividends are predicable
• Ex Bristol-Myers Squibb, Dow Chemical and gas
  and electric companies

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Growth Stock

• Potential earnings may be higher than the average
  earnings predicted for all the firms in the
  country.
• Usually do not pay dividends
• Engaged in activities that produce higher
  earnings/sales.
• i.e. Building new facilities, R D, new high
  quality products
• Examples for 90s Home Depot, SWA

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Cyclical Stocks

• Market value tends to reflect the state of the
  economy
• Buy while inexpensive, but before recovery
• Sell before economy declines
• Examples Ford, Centex (construction)

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Defensive Stock

• Remains stable during declines in the economy
• Steady earnings, continue dividend payments in
  economic decline
• Many blue chip and income stocks may be
  considered defensive stocks.
• Examples Proctor and Gamble

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Large Cap Stocks

• Capitalization shares outstanding x market price
• Large cap 10 Billion

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Mid Cap

• 2 billion - 10 Billion

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Small cap

• Less than 2 Billion
• Small companies with higher investment risk

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Penny Stock

• Sells for less than 1 a share typically,
• But could sell for up to 10
• New companies
• Sales very unsteady
• Wild fluctuation in stock price
• Risky

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Sources of evaluating Stock performance

• Financial section of newspaper
• Internet
• Stock advisory services ( Moodys, S P, Value
  Line, Mergents)
• Corporate news

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Factors that influence price

• Bull market-increase in market, optimistic
• Bear market- decline, pessimistic
• Current yield
• Total return
• Earnings per share
• Price-earnings ration ( P/E)

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Buying and Selling StockSection 9.3

• Describe how stocks are bought and sold
• Explain the trading techniques used by long-term
  investors and short-term speculators

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Primary Markets for Stock

• Primary market- investors purchase securities
  from a corporation through and investment bank or
  other representative.
• Such investors are commercial banks, insurance
  companies, pension funds, mutual funds

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Secondary Market

• After stocks are sold on the primary market they
  are sold on the secondary market.
• Secondary market-where existing financial
  securities are currently trades among investors
  on securities exchanges or through the over-the
  counter market

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Security Exchanges

• Market place where brokers who represent
  investors meet to buy and sell securities.
• NYSE (NYSE)
• American Stock Exchange (AMEX)
• Regional exchanges Chicago, san Francisco,
  Boston
• Foreign Exchanges Tokyo, London, Paris

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Over-the-counter Market

• Network of dealers who buy and sell stocks of
  corporations not listed on a securities exchange.
• Electronic marketplace

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Account Executive

• Stockbroker, Licensed individual who buys and
  sells securities for clients.
• Portfolios-all securities held by investor
• Commission- fee charged by brokerage firm for
  buy/selling your securities
• Churning- buy/selling a lot to collect more
  commission

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Brokerage Firms

• Full service
• Edward Jones, Merrill Lynch, Morgan Stanley smith
  barney
• Discount
• Charles Swabb
• Online
• Etrade, Scottrade, Ameritrade

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Stock transactions

• Market order-request to buy or sell stock at
  current market price
• Limit order-request to buy or sell stock at a
  specified price.
• Stop order-a type of limit order to sell a
  particular stock at the next opportunity after
  its market price reaches a certain amount

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Investment StrategiesLong-Term

• Buy-and-Hold technique
• Dollar Cost Averaging
• Direct investment and dividend reinvestment
  (Drips)

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Short-term techniques

• Buying on margin-borrow money from brokerage firm
  to purchase stock
• Selling short- selling a stock that has been
  borrowed from a brokerage firm and that must be
  replaced at a later date.